The 5 Percent Securitisation Retention Threshold – A Short Technical History

To discourage the “originate-to-distribute” business model (which created the US subprime mortgage securitisation industry and caused the recent financial crisis) policymakers require that originators retain sufficient risk to have so-called “skin-in-the-game”. In defining retention rules, European policymakers settled on the wording of “not less than 5%”. The 5% value was selected, instead of a higher percentage such as 10% or 20%, because of constraints imposed by the international accounting standard, IAS 39. IFRS 9, which will replace IAS 39 in 2018, will similarly constrain what is feasible. This short note explains how accounting constraints drove the choice of 5% and explains why these constraints will apply under IFRS 9.